Due to the inherent volatility of the crypto market, stablecoins play a crucial role in transferring on-chain value and securing credit.
Unit Protocol is a decentralized finance (DeFi) protocol that mints USDP stablecoins by backing them with multiple tokens. Investors then use USDP to issue stabilized loans without worrying if the collateral’s value will drop overnight.
USDP stablecoin confusion
Unfortunately, there is confusion surrounding the USDP stablecoin as there are two tokens with the same ticker.
A New York-based company called Paxos launched the stablecoin Pax Dollar (USDP) in September 2018, which is fully regulated and backed by banked US dollars. For every USDP stablecoin that Paxos issues as an ERC-20 token on Ethereum, it will be hedged to the dollar at a one-to-one ratio. So, 1 USD = 1 USDP or Pax Dollars. To complicate matters further, Pax Dollar (USDP) itself used to be called Paxos Standard (PAX).
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There is a second USDP stablecoin launched by Unit.xyz in November 2020. The fact that it shares an identical ticker symbol — USDP — as Pax Dollar doesn’t make things any easier for investors.
Unit.xyz also issues USDP as an ERC-20 token on Ethereum, but the Unit protocol does it differently because it runs as a decentralized platform, not a centralized entity like Paxos.
What is USDP stablecoin?
The whole purpose of the Single Protocol is to issue USDP stablecoins as loans without resorting to traditional banks. For example, centralized stablecoins like Pax Dollar (USDP), USD Coin (USDC), and Tether (USDT) are all issued by corporations, with their stablecoins backed by cash held at banks.
The One Protocol adheres to the spirit of decentralized finance (DeFi) by exclusively using cryptocurrencies to back USDP’s redeemable reserves, similar to Dai stablecoins. This should not be confused with an algorithmic stablecoin like the defunct TerraUSD from the collapsed Terra ecosystem.
While algorithmic stablecoins rely on dynamic minting and burning of the network’s native token like LUNA-UST, USDP stablecoin is simply backed by tokens instead of fiat money. Initially, USDP stablecoin was backed by 11 tokens, mostly originating from the most popular lending and yield farming dApps on Ethereum, including ETH itself.
These were KP3R, ETH, AAVE, MKR, WBTC, COL, YFI, UNI, CRV, COMP and STAKE. Since then, USDP stablecoins can be collateralized with over 20 tokens.
How does the unit log work?
For a stablecoin to be properly collateralized, collateral must not be withdrawn at will. Otherwise there would be the constant danger of a bank run. Because of this, Unit Protocol issues USDP by having users lock their tokens for a period of time. In return, users receive staking rewards.
When users deposit tokens to collateralize and spend USDP, they create a smart contract (Collateralized Debt Position, CDP).
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In other words, the single protocol balances the action between posting collateral for a loan and minting a stablecoin. Depending on which token is deposited as collateral, the borrower receives USDP stablecoin. However, depending on what type of token is chosen as collateral, the resulting USDP issuance will be different. This is because each token has a different Initial Collateral Ratio (ICR).
For example, to issue a USDP loan with MATIC as collateral, one would need to deposit $1,000 worth of MATIC tokens to receive $690 worth of USDP stablecoin. This is due to the fact that the ICR for MATIC deposits is 69%.
Of course, if one were to choose another stablecoin as collateral, then the ICR would be 100%. For example, if you deposit $1000 worth of USG stablecoin, you can borrow $1000 worth of USDP stablecoin.
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Likewise, each deposited token has its liquidation price, which depends on its volatility. More volatile tokens have higher liquidation ratios (LR) as a measure of debt to collateral. For example, if the collateral has 70% LR, this means the CDP could be liquidated if the collateral is worth less than the USDP issued (which is a loan).
Because of this, the LR percentage is always higher than the ICR percentage.
With these value-preserving mechanisms, the USDP maintains its peg to the dollar. To avoid losing part of the security through liquidation, they need to deposit more tokens. And if they don’t pay, the LR is triggered as shown below.
Unit Protocol uses the Chainlink network to measure real-time prices of deposited tokens to trigger collateral liquidation.
As with any dApp, Unit.xyz can be accessed without authorization using a non-custodial wallet like MetaMask. Then it’s just a matter of choosing the right collateral to issue USDP stablecoins as a loan. Once the USDP amount is repaid, the CDP smart contract unlocks the collateral so it can be withdrawn.
duck tokenomics
Unity Protocol chose a duck for its symbolic mascot. Likewise, DUCK is Unit’s governance and utility token, formerly called COL (as in security). The renaming occurred during the Lockdrop Coin Offering (LCO) in May 2020, while the protocol was still branded ThePay.Cash.
DUCK tokens fell in December 2020 when COL tokens exchanged at a ratio of 100:1, i.e. 1 COL = 0.01 DUCK. The DUCK Token Smart Contract can be viewed here.
The initial total supply of DUCK tokens was 2B. Originally ~97% of tokens were intended to be used for staking rewards. But the team decided to do many buybacks and burns to estimate the value of each coin. This significantly reduced the circulating DUCK supply to 160 million DUCK tokens as of November 2022.
DUCK tokens cannot be used as collateral to issue USDP, but they can be used to vote and regulate the protocol’s fees.
Unit Protocol Fees
Unit.xyz has three types of fees to consider when escrowing tokens for a USDP loan:
- issuing fee — a percentage charged each time a depositor enters CDP to spend USDP.
- liquidation fee — a penalty fee if the collateral is enforced, based on the percentage of the loan to be paid. The recovery fee is automatically deducted from the security.
- stability fee — a fixed percentage fee paid each time collateral is posted to borrow USDP. This is the cost of issuing USDP debt over a 12-month period.
All fees are subject to change and coordinated by DUCK token holders.
Unit.xyz background
The team behind Unit Protocol is anonymous. The platform itself was launched as PayCahs and later renamed Unit Protocol in July 2020. Still, the platform was reasonably popular even before its official launch. In May 2020, it had almost 4,000 ETH locked during the first lockdrop week.
Disclaimer for the series:
This series article is for general guidance and information only for beginners participating in cryptocurrencies and DeFi. Nothing in this article should be construed as legal, business, investment or tax advice. Consult your advisors for all legal, business, investment and tax implications and advice. The Defiant is not liable for lost funds. Please use your best judgment and exercise due diligence before interacting with Smart Contracts.
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